Accounting Policy – Accounting Policies refer to specific accounting principles and methods of applying these principles adopted by the enterprise in the preparation and presentation of financial statements. Accounting policies are the specific principles and procedures implemented by a company’s management team and are used to prepare its financial statements. These include any methods, measurement systems and procedures for presenting disclosures.
There is no single list of accounting policies, which are applicable to all enterprises in all circumstances. Enterprises operate in diverse and complex environmental situations and so they have to adopt various policies. The choice of specific accounting policy appropriate to the specific circumstances in which the enterprise is operating, calls for considerate judgement by the management
The areas wherein different accounting policies are frequently encountered can be given as follows:
- Methods of depreciation, depletion and amortization;
- Valuation of inventories;
- Treatment of goodwill;
- Valuation of investments;
- Valuation of fixed assets.
This list should not be taken as exhaustive but is only illustrative. As the course will progress, students will see the intricacies of the various accounting policies.
Suppose an enterprise holds some investments in the form of shares of a company at the end of an accounting period. For valuation of shares, the enterprise may adopt FIFO, average method etc. The method selected by that enterprise for valuation is called an accounting policy. Different enterprises may adopt different accounting policies. Likewise, different methods of providing depreciation on fixed assets, i.e. Straight line, written down, etc. are available to the business enterprises which will lead to different depreciation amounts.